Source: Peter Byrne of The Energy Report (5/22/14)
There is money to be made as oil and gas prices fluctuate. Wunderlich Securities' Analyst Jason Wangler is no Pollyanna—he casts a cold, analytical eye on the volatility of the energy markets. In this interview with The Energy Report, Jason explains how to create a solid portfolio of attractive North American juniors—with lucrative side trips to South America and Africa.
The Energy Report: Jason, you focus on the growth of junior oil and gas companies and the expansion of wells in the Midwest and Southwest of the U.S. What is the macroeconomic view of this sector so far this year?
Jason Wangler: Energy is doing well. Oil and natural gas production is robust. The Bakken in North Dakota, the Niobrara in Colorado, and the Permian and Eagle Ford in Texas are all showing great results. Booming oil and gas production numbers are translating into solid earnings, cash flows and revenues for the juniors.
TER: Is the price volatility of the past few years leveling out?
JW: Oil and gas prices are driven predominantly by global economics. A couple of years ago, oil prices quickly dropped from $130–140 per barrel ($130–140/bbl) to $30/bbl. The price has now stabilized in the $90–100/bbl range. Energy markets are delicate from the supply and demand standpoint, but as long as there is not a significant downturn in the global economy, a series of significant drivers show that oil will remain in the $80+/bbl range, with less volatility.
TER: What are the drivers?
JW: On the supply side, growth in the U.S. is fantastic, but we remain a net importer of oil. We consume 10–11 million barrels per day (10–11 MMb/d) and we produce 6–7 MMb/d. That means that we import 3–5 MMb/d. We are playing catch-up with ourselves, so to speak, while the rest of the world is also looking for more oil and gas resources. Output by the Organization of the Petroleum Exporting Countries (OPEC), except for Iraq, is not growing as much as people had expected. And Russia could throw a monkey wrench in the market given the Ukraine situation. That said, demand generally tracks the growth of the world economy, and supply growth tracks demand/prices of the commodity.
TER: In your last interview with The Energy Report, you spoke positively about Triangle Petroleum Corporation (TPO:TSX.V; TPLM:NYSE.MKT). What's the latest with that Denver-based firm?
JW: Triangle is doing a great job of building out its plans. Its focus is in the Williston Basin, the Bakken and the Three Forks area in North Dakota. It has boosted its production into the 10 thousand barrel a day (10 Mb/d) range. In addition to its exploration and production (E&P) business, it runs two other businesses that drive its revenue. One is a completion services company that can frack Triangle's own wells, as well as third parties' wells in the region. It owns a lot of pipeline infrastructure in the Bakken. The oil infrastructure in North Dakota is still very much in its infancy. Producers are using rail and trucks to move oil out of the basin. With its pipelines, Triangle is fairly self-sufficient. It really is a portfolio of energy companies, and all of its businesses are firing on all cylinders.
TER: Does that split management's focus?
JW: Triangle is predominantly focused on the E&P business—the actual exploration and production of its acreage. It has a CEO who separately runs RockPile Energy Services, the services company of which Triangle owns 100%. It also owns 40% of Caliber Midstream, which is the midstream portion. The other 60% of Caliber is owned by a private equity firm. There is not as much managerial work to be done there.
TER: How do its financial fundamentals hold up?
JW: Triangle's share price has done well of late. The winter months this year in North Dakota were very tough. But Triangle reported a solid quarter despite the weather issues. Its debt/cap ratio is in the 20–25% range, which is a bit below a typical E&P company's ratio. It will probably run up more debt as the company expands, but it is in a good position to grow without an equity raise.
TER: Do you have any other picks in the Bakken?
JW: In the Williston, which is a pure play, we likeWhiting Petroleum (WLL:NYSE). It has done a tremendous job of maximizing returns by reducing completion costs.
Halcón Resources Corp. (HK:NASDAQ) has a nice Bakken position. It is moving down the tracks with impressive completion techniques that are generating 30–40% increases on the initial production rates. This property is Halcón's cash cow asset going forward. It is also in the Tuscaloosa Marine Shale in Louisiana and Mississippi, along with Goodrich Petroleum Corp. (GDP:NYSE). We are starting to see some interesting wells come in there. And in East Texas it is in the northern offshoot of the Eagle Ford.
Floyd Wilson is now Halcón's CEO. He had tremendous success with his sale of Petrohawk Energy Corp., which was in the Eagle Ford. Wilson and his team have a lot of experience in the region and are starting to show good results in fields near Houston, as opposed to the fields around San Antonio, where the Eagle Ford started.
TER: What other plays are you following in Texas?
JW: The Permian in West Texas is the most profitable play in the U.S. The horizontal movement in the Permian has been very aggressive lately, and it is creating great value. The Permian has always had strong vertical well oil production, and now the horizontal wells can target individual zones. Firms can drill three, four, or five wells on the same swath of acreage in the different zones, effectively making five or six plays on top of each other. The pricing for the profitable acreage is going through the roof.
Diamondback Energy Inc. (FANG:NASDAQ) is enjoying a good run in the Permian. It has only been public for a couple of years, but its stock price has quadrupled. Pioneer Natural Resources Co. (PXD:NYSE) is the large player in the Permian game, but Diamondback is just as active and it controls a very nice chunk of Permian acreage.
Resolute Energy (REN:NYSE) bought into the Permian near Diamondback, and also has property in the Delaware Basin near EOG Resources Inc. (EOG:NYSE). Resolute has a tremendous asset package. As we speak, it is selling some of its assets and looking to retool its balance sheet so it can expand its activities in the Permian—because the results there have been great.
TER: Do you have any picks in the oilfield service sector in North America?
JW: The services market is very tough because natural gas prices are depressed, to say the least. Services companies are struggling to keep their footing. The E&P companies have had the upper hand for a while, but that is starting to even out, which will benefit the service firms. Demand for best-in-class, high-specification rigs continues to increase.
Pioneer Energy Services Corp. (PDC:NYSE) has state of the art equipment. Its utilization rate is 90%, versus the rate of 70% for older equipment in the services space. It is in the process of building more drilling rigs.
On the compressor side of the business, Natural Gas Services Group Inc. (NGS:NYSE) and Tetra Technologies Inc. (TTI:NYSE) have nice inventories. When gas prices bounce back, there will be more demand for compression, because producers will need to maximize production.
TER: Do service firm stock prices track the price movements of explorers and developers?
JW: They are all tied together in the long-term perspective. In the short term, the service names are experiencing a tougher business environment than the E&Ps. Both spaces are predicated on energy prices. If oil and gas do well, the E&P companies will spend money drilling, and that means contracting with the oilfield services companies. Overall, the share prices of production and services firms move in tandem over extended periods.
TER: We spoke previously about Harvest Natural Resources' (HNR:NYSE) plays in Venezuela and Gabon? How are those operations developing?
JW: Harvest shareholders just voted to monetize its Venezuelan assets. The only thing left on the table for that deal is to get Venezuela itself to approve the sale. We think that will certainly happen. The buyer, Pluspetrol, has about 1 billion barrels (1 Bbl) in reserves. It is a South American company, so there is a cultural fit. Harvest will exit Venezuela with nice chunk of change, about $220M net, or $5/share on a $4.50 current stock price. Harvest is now talking about monetizing its sizeable position in Gabon. It does not have anymore debt, so the balance sheet is robust. And it does not have any properties outside of Gabon to spend the Venezuelan cash on. It could sell Gabon and spin off the cash to investors, or it could develop Gabon entirely on its own with the new money. It could also initiate a dividend, or buy back some shares.
TER: What's the nature of the asset in Gabon?
JW: It is a large offshore block. Harvest has four discoveries in the shallow waters off Gabon with significant proven resources that it could develop in the near term. It could have production going within 12–18 months on these four prospects. It also has a lot of deep water prospectivity in the region. Total S.A. (TOT:NYSE) drilled a well in the deep water nearby and has announced interesting results. Harvest's offshore asset could be as massive as Angola's bonanza.
TER: What other companies are successfully surfing the supply and demand curve?
JW: Gulfport Energy Corp. (GPOR:NASDAQ) is on a tremendous run. Its Utica position is one of the best assets in the country. Its production this year is growing by 200%+, which is unheard of from an organic perspective—and it did it with cash flow!
Bill Barrett Corporation (BBG:NYSE) is a Niobrara player with a really great asset in Colorado. As good results continue to emerge, people will flock to that name. Barrett has done a great job of turning the Colorado story around in the last 18 months. The Colorado property was a natural gas exploration play. With natural gas falling out of bed for five straight years, Barrett's debt level rose. It was still attacking natural gas, and this strategy was not going very well. There was a managerial change at the beginning of 2013, and the firm's focus has shifted toward oil development. It sold assets to improve the balance sheet. It brought the debt level back under $1B, to a 40–45% debt/cap ratio, when it had been in the 60% range. The new executives brought the asset portfolio down to a manageable level. Each property is a core asset.
TER: Thank you for your time today, Jason.
JW: Thank you, Peter.
Jason Wangler has over five years of equity research experience focused on the exploration and production and oilfield services sectors of the energy space. Jason previously worked at SunTrust Robinson Humphrey and Dahlman Rose & Company before moving to Wunderlich Securities. He also previously worked at Netherland, Sewell & Associates, Inc. as a petroleum analyst. He received his Masters in Business Administration from the University of Houston where he was also named the 2007 Finance Student of the Year. He received his Bachelor of Science degree in Business Administration with a focus on Finance from the University of Nevada where he was named the 2003 Silver Scholar award winner for the College of Business Administration. In 2010 he was highlighted as a "Best on the Street" analyst by The Wall St reet Journal and has been a guest on CNBC.
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